IDEAS home Printed from https://ideas.repec.org/a/eee/jeeman/v56y2008i2p131-140.html
   My bibliography  Save this article

Optimal mix of emissions taxes and cap-and-trade

Author

Listed:
  • Mandell, Svante

Abstract

In practice, different emitters of a particular pollutant are sometimes subjected to different control mechanisms. This paper focuses on the situation where a part of the economy is regulated by a cap-and-trade program, while the rest is subjected to an emissions tax. Using an extended version of Weitzman's 'Prices vs. Quantities' model [M.L. Weitzman, Prices vs. quantities, Revi. Econ. Stud. 41 (1974) 477-491], we analyze the conditions under which this is superior, from an efficiency point of view, to subjecting the whole economy to either of these control mechanisms. The paper addresses a crucial trade-off between two sources of efficiency loss, one due to cost-effectiveness issues and another due to emissions volume. This trade-off determines the optimal size of each sector. It is shown that the size of the taxed sector, at an optimum, increases with the relative steepness of the aggregate marginal abatement cost function.

Suggested Citation

  • Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
    • Handle: RePEc:eee:jeeman:v:56:y:2008:i:2:p:131-140
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0095-0696(08)00038-7
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    3. Ian W.H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 2002. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 25, pages 471-503, Edward Elgar Publishing.
    4. N. J. Ireland, 1977. "Ideal Prices vs. Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(1), pages 183-186.
    5. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 1-17, January.
    6. Yohe, Gary W., 1981. "Should sliding controls be the next generation of pollution controls?," Journal of Public Economics, Elsevier, vol. 15(2), pages 251-267, April.
    7. James M. Malcomson, 1978. "Prices vs. Quantities: A Critical Note on the Use of Approximations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 203-207.
    8. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-691, September.
    9. Watson, William D. & Ridker, Ronald G., 1984. "Losses from effluent taxes and quotas under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 11(4), pages 310-326, December.
    10. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    11. Jean Jacques Laffont, 1977. "More on Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(1), pages 177-182.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kennedy Peter W & Laplante Benoit & Whittington Dale, 2010. "Simple Pricing Schemes for Pollution Control under Asymmetric Information," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-37, February.
    2. Tang, Bao-Jun & Wang, Xiang-Yu & Wei, Yi-Ming, 2019. "Quantities versus prices for best social welfare in carbon reduction: A literature review," Applied Energy, Elsevier, vol. 233, pages 554-564.
    3. de Palma, André & Lindsey, Robin, 2020. "Tradable permit schemes for congestible facilities with uncertain supply and demand," Economics of Transportation, Elsevier, vol. 21(C).
    4. Takayoshi Shinkuma & Hajime Sugeta, 2022. "Trial runs as environmental policy with strategic firms," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 24(2), pages 285-303, April.
    5. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
    6. Shinkuma, Takayoshi & Sugeta, Hajime, 2016. "Tax versus emissions trading scheme in the long run," Journal of Environmental Economics and Management, Elsevier, vol. 75(C), pages 12-24.
    7. Shrestha, Ratna K., 2001. "The choice of environmental policy instruments under correlated uncertainty," Resource and Energy Economics, Elsevier, vol. 23(2), pages 175-185, April.
    8. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
    9. Lori Bennear & Robert Stavins, 2007. "Second-best theory and the use of multiple policy instruments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 111-129, May.
    10. Shrestha, Ratna K., 2017. "Menus of price-quantity contracts for inducing the truth in environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 83(C), pages 1-7.
    11. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.
    12. Stavins, Robert, 2004. "Environmental Economics," Working Paper Series rwp04-051, Harvard University, John F. Kennedy School of Government.
    13. Weber, Thomas A. & Neuhoff, Karsten, 2010. "Carbon markets and technological innovation," Journal of Environmental Economics and Management, Elsevier, vol. 60(2), pages 115-132, September.
    14. Guy Meunier, 2015. "Prices vs. quantities in presence of a second, unpriced, externality," Working Papers hal-01242040, HAL.
    15. Carlos Chávez & John Stranlund, 2009. "A Note on Emissions Taxes and Incomplete Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(1), pages 137-144, September.
    16. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545, Elsevier.
    17. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    18. Martin L. Weitzman, 2020. "Prices or Quantities Can Dominate Banking and Borrowing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 437-463, April.
    19. Arthur Caplan, 2006. "A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(4), pages 471-492, August.
    20. Brozovic, Nicholas & Sunding, David L. & Zilberman, David, 2004. "Prices versus Quantities Reconsidered," 2004 Annual meeting, August 1-4, Denver, CO 20257, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeeman:v:56:y:2008:i:2:p:131-140. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622870 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.